[Say what you want about this guy, he's been running a good line on California power]
New York Times
June 3, 2001
Watt Price Ideology?
By PAUL KRUGMAN
I once had a math teacher who responded to student errors by saying
"Save that answer I may ask that question someday." I thought of him
after George W. Bush's apparently pointless trip to California.
During that trip, Gov. Gray Davis asked for a temporary cap on
wholesale electricity prices a request that gained extra force because
it was backed by economists with strong pro- market credentials,
including Alfred Kahn, who oversaw the deregulation of airlines,
trucking and other industries in the 1970's. Mr. Bush, however, was
unmoved. Again and again he declared that a price cap would do nothing
either to increase supply or to reduce demand.
Save that answer, Mr. Bush. We might ask that question someday.
Actually, Mr. Bush's assertion may have been wrong even on its own
terms. I'll come back to that in a minute. But the most striking thing
about his declaration was that it had nothing to do with the actual
problem.
For the issue facing California right now is not how to increase
supply and reduce demand. It's too late for that; summer is almost
upon us, and it is simply a fact of life that there will be power
shortages in the months ahead. It is important that the state build
power plants as quickly as possible, so that this shortage is only
temporary. But not to worry: power plants are being built at a furious
rate, in California and in the nation at large. Indeed, last week the
credit agency Standard & Poor's expressed concern that electric
generating capacity is being added so quickly that the industry will
soon face a glut.
Meanwhile, however, the temporary lack of capacity has led to
incredibly high wholesale electricity prices, which are a huge
financial burden on the state, over and above any disruption that may
be caused by physical shortages of power. Nobody knows exactly how
much California will pay for power this year, but reasonable estimates
suggest that it will pay at least $50 billion more than two years ago
an increase of more than $1,500 for every resident. The great bulk of
that represents not an increased cost of production but windfall
profits for a handful of generating companies.
The main purpose of a temporary price cap would be to reduce though by
no means eliminate this transfer of wealth away from California
residents. That is, we're talking about dollars, not megawatts. And
Mr. Bush's response is therefore almost surrealistically beside the
point.
You could argue that any financial benefit from price caps would be
more than offset by a worsened physical shortage. But that's a hard
case to make. Nobody has proposed capping prices at a level that would
prevent power producers from making extraordinarily high profits; why
should this reduce the supply of power?
It's true that Econ 101 teaches that price controls tend to produce
shortages. But this would be a minor effect in this case, since
neither production nor consumption would be much affected. And anyway,
students who go beyond Econ 101 learn that strictly speaking the
standard argument against price controls applies only to a competitive
industry. A price ceiling imposed on a monopolist need not cause a
shortage, if it is set high enough; indeed, price controls on a
monopolist can actually lead to higher output. That's not an argument
you want to use too often, but given the extraordinary prices now
being charged for electricity, and the considerable evidence that
producers are exercising monopoly power, if ever there was a case for
a temporary price ceiling, California's electricity market is the
place.
I am actually somewhat surprised by Mr. Bush's obtuseness on this
whole subject. No doubt his determination to answer the wrong question
is deliberate: misrepresenting policy issues is, after all, standard
operating procedure for this administration. But even on a cynical
political calculation, Mr. Bush's remarks seem to be foolish, only
reinforcing the sense that he neither understands nor cares about
California's problems.
Maybe Mr. Bush's advisers are knee-jerk ideologues who believe that
the market is always right, even when textbook economics says it is
wrong. Or maybe they are so close personally to energy industry
executives that they believe that whatever is good for Enron is good
for America.
Whatever the real story, it's clear that this administration not only
has no answers for California, it won't even listen to the question.
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